Monday, July 29, 2019 News

Q&A: Cengage/McGraw-Hill Merger

Open Education

As opposition mounts to the merger between two of the largest textbook publishers, SPARC has answers to common questions and an update on what we're doing to stop it

Over the past year, one of SPARC’s top priorities has been tracking the evolution of the academic publishing industry and its implications for the future of research and education. The urgency of the issues outlined in our Landscape Analysis was put into sharp relief in May, when Cengage and McGraw-Hill—the second and third largest college textbook publishers—announced plans to merge. If approved by federal regulators, the merger would reshape the U.S. higher education course material market as a duopoly—with potentially dire consequences in terms of price, access, and control of student data.

Shortly after the merger was announced, SPARC began to explore avenues for taking action. Over the past two months, we’ve been working with industry and antitrust experts to build arguments against the merger, which we intend to file with the Department of Justice’s Antitrust Division. While we acknowledge that the current regulatory environment makes opposing any merger an uphill battle, we think that this is an important opportunity to educate antitrust enforcers about the unique challenges presented by the textbook market, and especially the implications of the growing control of academic publishers over key higher education infrastructure.

Earlier today, student governments and consumer organizations filed letters opposing the merger with DOJ. SPARC stands with these groups, and we hope that their calls to action will open a conversation with regulators about the merger’s negative consequences for students and higher education. As SPARC continues to work on our own more detailed filing, we wanted to share some of what we’ve learned by answering some common questions we’ve heard from the community.

Update: On August 14, 2019 SPARC submitted a detailed filing opposing the merger to the Department of Justice. The filing can be found here, and our press release is here.

Q&A: Cengage/McGraw-Hill Merger

What is the Cengage and McGraw-Hill merger?

On May 1, 2019, the education publishers Cengage and McGraw-Hill Education announced plans to merge. The deal has been dubbed a “merger of equals,” and the post-merger company intends to operate under the McGraw-Hill brand with the leadership of Cengage CEO Michael Hansen. As the second and third largest companies that dominate the college course material market, the merger would create a combined firm of more than $3 billion in pro-forma revenue. This would put them behind chief rival Pearson in terms of overall size, but more importantly, ahead of them in terms of higher education market share.

In announcing the merger, the companies have highlighted their plans to accelerate the transition to digital course materials that will be leased—rather than sold—to students. The backbone of their plan is continuing the push for “inclusive access” deals, through which institutions automatically subscribe students to digital materials upon enrolling in a course.

Both companies have also signaled intent to expand Cengage’s full-catalog “unlimited” subscription with McGraw-Hill’s content, which gives access to the company’s full catalog of digital materials and bundled services. The companies also indicated to investors that they intend to eliminate the secondary market within the next 4-6 years by moving to a rent-only model for print textbooks (Pearson hinted at a similar plan in its recent “digital first” announcement).

How much of the market would Cengage and McGraw-Hill hold?

According to the Association of American Publishers (AAP), the revenues of the top six higher education publishers total approximately $3.3 billion. Pearson has the largest share, estimated at around 40%. Based on their 2018 revenues, Cengage holds 24% share and McGraw-Hill holds 21%. The remaining 15% is divided between Wiley, Macmillan and Oxford University Press. While there are other publishers who publish higher education course materials, it is generally assumed that the AAP figure encompasses the vast majority of the market.

Based on these numbers, the combined company would hold a 45% share of the market. This is well above the threshold in federal guidelines to consider the merger anticompetitive. Bottom line, the merger would turn the market into an effective duopoly.

What does the merger mean for textbook prices?

You don’t need to buy a $250 economics textbook to know that a market with two large players has less competition than one with three. Textbooks are a classic example of a “captive market,” where students are required to buy whatever materials they’ve been assigned. The problem is exacerbated by the fact that the same three large companies have dominated the market for more than two decades. As a result, textbook prices have risen more than 700% over the last decade according to the Producer Price Index, which is nearly six times the rate of inflation. As Cengage CEO Michael Hansen told CNBC, “Over time, the industry just ratcheted up the prices — sometimes 10 percent, twice a year — and that has led to an unsustainable model.”

However, recent trends suggest that major publishers are feeling pressure to compete on price more than ever before. The relentless annual price increases have started to slow, and in the case of student spending, even tilt downward. While there are manifold reasons contributing to these trends (both positive and negative) the changes are in a better direction than the status quo. Downward pressure from the secondary market and the availability of OER is having an impact.

If the merger is approved, it would remake the textbook market from an oligopoly into a duopoly dominated by two massive firms, likely undoing any progress that has been made toward increasing price competition. As the market continues its transition away from print and toward digital, it is not hard to imagine that these two companies will simply split the market and resume their regular rate of price increases, rather than attempt to compete. Pearson’s recent intent to go “digital first” and the growth of Cengage’s “unlimited” model only make this outcome more likely.

What would the merger mean in the long term?

The future of academic publishing is not just about digital content—it also is about the data that can be collected on users and how it can be exploited. SPARC laid out in our Landscape Analysis how the industry is trending in this direction, and in the case of research publishers, is already there. While data and analytics can be used for good in education, without the proper policies, contracting terms, and governance structures, there is also likely to be massive unintended consequences. Even with federal student privacy laws that afford some protections, the opportunities for data harvesting and exploitation go far beyond what lawmakers could ever imagine a few years ago, let alone a few decades ago.

Allowing two large publishers to merge into a single giant with near-majority share of the market could exacerbate these drastic unintended consequences. Doubling market share means doubling the amount of data these companies can collect and control. As the recently-launched Department of Justice investigation into Google, Apple, Facebook, and Amazon highlights, monopolistic activities can relate not just to dollars and cents, but also to data. While the issues raised by data and analytics in academic publishing are critical with or without the merger, the potential challenges would be exacerbated by concentrating the student data market into fewer hands.

How can two such large companies can get away with merging?

The companies may try to convince regulators that the benefit to consumers outweighs the potential loss of competition. Cengage and McGraw-Hill have talked a lot about how the merger will expand “inclusive access” and digital subscriptions, which they say will lower prices for students. This might seem true compared to the astronomical price of print textbooks, although it is less clear in comparison to used book and rental prices. There is also a big question whether switching the whole market to digital will allow publishers to resume their historical rate of price increases. How regulators assess these questions will affect the likelihood of the merger.

Another way that these companies might make the case for the merger is by trying to expand the definition of the relevant market. If their market share is measured against a bigger pool of companies, it will not look quite as large. They might argue that they compete against used booksellers, learning management system companies, or even try to place an artificial market value on open educational resources. However, this could be a tougher case with how federal guidelines are written.

What is the likelihood of being able to block the merger?

If history is any guide, the current regulatory environment tilts the playing field in the merger’s favor. It is unlikely that the companies would have proposed the merger unless they had some preliminary conversations with DOJ and were reasonably confident that it would go through. However, there is a compelling case that the merger would reduce competition in the market, so at the very least, the review process is likely to be lengthy.

The possible outcomes are that DOJ will either approve the merger as-is, approve the merger on the condition of remedies (for example, selling off certain pieces of the business), or file a lawsuit to block the merger. Ultimately DOJ would need to win the case in court to truly block it, although the threat of a protracted legal battle is often enough for companies to abandon merger plans. This recently happened in the case of the Quad/LSC merger.

When will we know more?

Cengage and McGraw-Hill announced the merger in May and have said that they expect it to be approved in early 2020. For a merger as large and complex as this one, that kind of timeline for regulatory review is not unusual. Since this phase of the process tends to take place behind closed doors, it may be another five to six months before we know more publicly. However, please know that SPARC and our allies will be actively working on this over the coming months, and we will keep you as up to date as possible as the process unfolds.

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